A View from the Trenches, November 5th, 2009: "Back to our thesis on gold"
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I really don’t have much to add today, given my comments from
yesterday. Yesterday, the trading was all about getting out of the USD
and into risky assets. As I mentioned, I see this trade, called by some
analysts a carry trade, being played out with a certain caution.
Where is the caution? The caution is seen in the equity market
mainly, which is starting to trade range bound. We have seen range
bound trading in credit, but now I believe we may see the same played
out in equities. If I am right, it could be a good thing: The rally
would not grow exponential and at the same time, the sell off would be
avoided….
The natural question therefore is how long this situation can last.
This is what everyone is asking these days. All I can say is that the
end is now closer than before. How do I know? I have full certainty
after yesterday’s statement by the Federal Open Market Committee. In
summary, the Fed sees inflation as the only way out of this mess. As
long as there is no inflation, debts will be a burden. Therefore, the
Fed will keep “printing” until that inflation shows its ugly head.
In conclusion, the coordinated front in monetary policy that we saw
until this spring is totally broken now. The world is now clearly
divided between those countries/currency areas that will seek to avoid
further monetary expansion (i.e. Australia, European Union, Norway,
Israel, etc.) and those who will subordinate the value of their
currency to the employment rate (i.e. USA, Canada, UK, Brazil, China).
Coordination showed its first crack when the UK decided to
unilaterally follow the path of quantitative easing, given its poor GDP
performance. Then we had Australia raising rates, followed by Norway.
We had Brazil betting on a weak currency via the very unwise policy of
taxing capital flows. Canada showed that it is willing to tweak the
rules in favor of a weak currency either behind the scenes, with its
repurchase agreement transactions, or publicly. Two days ago, India
openly dumped $6+BN of reserves in exchange of gold and yesterday, the
Fed showed us its true face.
Why should we care about this? Back on April 16th and 21st (refer: www.sibileau.com/martin/2009/04/21 , “Two main market thesis”) I suggested one of the main thesis for this crisis. I reproduce it below:
“When there is global coordination of inflationary
monetary policies, gold cannot be a safe and lucrative asset. When
inflationary monetary policies are not globally coordinated, gold is a
safe and lucrative asset”
The thesis I postulated in April was correct, and gold made it to
1,097 intraday yesterday. I also said the opportunity to buy gold was
on September 29th, triggered by the confusion in the foreign exchange
market, when Robert Mundell suggested the convertibility of the Euro to
the USD (i.e. the 100% coordination of monetary policy).
On September 29th (refer: www.sibileau.com/martin/2009/09/29 ) I wrote: “...Thus,
what is the conclusion one can make here? Would the Fed and the ECB
give up their powers in the name of stability? It seems too far-fetched
to me (…) What is one to make out of this? If the idea is good but
doesn’t seem feasible, the late sell off in gold should be seen as an
opportunity…”
Since September 29th, gold in terms of the USD is up 9.9%, from $991
to $1,089 (…If I only followed more decisively what I write…). Nevertheless, as long as the coordination in monetary policy remains broken, gold will continue to rally.
What next? There is really nothing new. Therefore, I refer you to my letter of May 26th, “A short description of the process”: www.sibileau.com/martin/2009/05/26 . I think the May 26th letter should refresh some key concepts on this crisis.
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